Osborne was wrong to ignore the London Stock Exchange

Friday 25 March 2011 11:27 BST

The Budget speech on Wednesday was billed as a "Budget for Growth" - a prescription to help business expand and build a prosperous future for Britain.

But what was really interesting was that Chancellor George Osborne spoke on this subject for an hour but never once did he mention the stock market, or equity finance or the central role stock markets have in the allocation of capital throughout the economy. It just did not figure on his agenda.

Growth in the Chancellor's world comes down to tinkering with taxation and regulation, and finding ways to put pressure on the banks to lend.

On second thoughts, what is really interesting - because it shows how much our society is losing the equity culture - is that no one noticed. The death of equities is passing without comment.

The primary lobbying group for the financial services industry, TheCityUK, focused on taxation and regulation but never mentioned stock markets in its Budget reaction.

The Association of British Insurers, whose members own a huge chunk of the market, talked about planning, savings, health and safety, tax and regulation, but not equities or stock markets. The National Association of Pension Funds likewise. The Investment Management Association talked about children's savings, and changes to pension schemes - and in passing managed to express regret that stamp duty on share transactions had not been shelved.

The same could be said of a dozen other trade bodies. None of the agencies which have been the natural home for equities and their investors argued the role of stock markets as the primary engine for growth.

Even the Quoted Companies Alliance, the lobby group for mid-cap listed companies barely mentions the stock market. In its response to the Budget speech, the alliance enthused mainly about the tax changes which might encourage more money to flow into venture capital trusts, enterprise zones and similar vehicles.

Let's hope its enthusiasm is not misplaced, though it is realistic to have doubts. Experience shows that once tax changes fall into the hands of smart City accountants they become much more about avoidance for the wealthy than helping small businesses grow.

Nor did the big accountancy firms have anything to say - though it is perhaps just as well. With their intellectual nonsense of IFRS 17 and mark to market accounting, they have probably done more than any other organisation to undermine the principle of equity investment by pension schemes.

With friends like this the London Stock Exchange scarcely needs enemies. No one seems to cotton on to the fact that you can't have healthy capitalism without healthy stock markets.

We live in a world where AIM is in the doldrums, there are only a handful of new issues, private investors put their money into emerging markets, gold and commodities while UK equity returns disappoint. But no one seems prepared to tackle the structural reasons for this happening.

Yet there is so much the Chancellor could have done. For example, when he was in opposition he talked about removing the tax bias in favour of debt, and he still likes to ridicule Gordon Brown as the architect of unsustainable, debt-fuelled growth.

But in office he has done nothing. It still remains the case that equity returns get taxed four times - as corporation tax, as income tax, as capital gains tax and as stamp duty - and companies actually get a tax subsidy for piling on debt.

Osborne knows too much debt finance is bad but he does nothing about it. He has left in place a tax regime which favours excessive leverage and the consequent instability. Had he changed it, he would have rekindled enthusiasm for equities.

This has implications too for the debate about bank lending to small businesses. The reason banks don't want to lend is that it is too easy for them to lose money - it is too risky. It is too risky because debt is being used as a substitute for equity.

Small businesses need capital provided by people who are prepared to risk losing it and who demand returns only when the business has become profitable - in other words shareholders. Bank loans which are costly and can be instantly withdrawn are a very poor substitute. Getting increased amounts of equity into the capital structure of small businesses is surely a better, long-term bet than strong-arming banks to lend when they don't want to.

Osborne also seems to have forgotten - or perhaps he never knew - that the stock exchange put more new capital into British businesses than either the Government with its bank rescues or the Bank of England's quantitative easing.

Contrast this bureaucratic and political indifference with Canada, and with the reaction there and here to the proposed merger of the Toronto and London stock exchanges.

Here there has been almost no public comment or analysis from any trade body, pension fund or insurance company on what such a move might mean for the markets.

In Canada, however, the Ontario Teachers Pension Plan - which is one of the best in the world, admittedly - has carried out a major analysis on its implications for low-cost trading, for corporate access to capital and liquidity, and for enhanced international investment opportunities.